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Budget deal offers playbook for next round

The just-in-time budget deal Congress passed on New Year’s Day calls to mind Samuel Johnson’s observation about dogs that walk on their hind legs: “It is not done well; but you are surprised to find it done at all.”

The same could be said of U.S. lawmakers. For more than a year, the conversation in Washington focused on achieving a Platonic grand bargain to overhaul the tax code, reform entitlement programs and reduce the national debt.

We have supported a compromise that would trade Medicare reforms for higher tax rates and a tax-code overhaul. It would have been grand if the package sent this week to President Barack Obama accomplished even a bit of that. It doesn’t; Congress is too polarized to reach such a deal. Still, this week’s agreement doesn’t deserve the derision it’s getting from some economists and fiscal policy experts.

For now, Congress has found enough common ground to defuse a $600 billion fiscal time bomb, no easy feat considering our divided government and the deep ideological differences between the parties. The combatants will have to summon the courage to do it again in two months, when the Treasury will have depleted its borrowing authority, the deadline for stopping $110 billion in automatic spending cuts arrives, and the law that funds the government expires.

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At that point, with the United States on the verge of default, a painful sequestration and a government shutdown — fiscal cliff doesn’t seem adequate to describe it anymore — we’d love to see the elusive “grand bargain.” But another round of successful small-ball will suffice, thank you.

The last phase of the negotiations should serve as a guide, starting with one of the agreement’s biggest lessons: Cross- party personal relationships matter. When Obama and House Speaker John Boehner failed to work out a deal after repeated attempts spanning 18 months, Senate Minority Leader Mitch McConnell turned to Vice President Joe Biden. The two 70-year-olds served together for about a quarter-century in the Senate, almost always on opposite sides of the issues yet never forgetting the validity of the other’s political imperatives or point of view.

In less than two days, they worked out the deal Congress just adopted. “Simply put,” said Jared Bernstein, the vice president’s former chief economist, “they remember a day when politicians compromised.”

The agreement’s economic effects could surprise the naysayers. It sensibly retains some short-term fiscal stimulus while increasing revenue in the long run. The measure, for example, extends unemployment insurance for about 2 million jobless people whose benefits have ended. It also continues refundable tax credits for low-income families and college students.

True, the payroll tax cut was allowed to lapse. Its absence could pull more than $100 billion out of the economy in 2013, and is the primary reason that an estimated 77 percent of taxpaying households will face higher levies this year. But losing the two-percentage-point tax break, which was never meant to be permanent, is a small price to pay for avoiding income-tax increases for more than 99 percent of taxpayers.

Many a commentator has pointed out that the federal budget will be $4 trillion bigger than projected, even with the deal. That analysis, however, is based on the assumption that all the Bush-era tax cuts, along with numerous other annual patches, would have expired as scheduled — a remote possibility at best. The view among the deficit hawks at the Committee for a Responsible Federal Budget is that the national debt will shrink by $650 billion over 10 years, using more realistic assumptions.

Obama can take pride knowing that the agreement improves inequality somewhat. The burden of higher taxes will fall hardest on the top 1 percent, and particularly on the top 0.1 percent, of income earners. Those making more than $2.7 million will pay an average of $443,910 more in 2013, or 26 percent of the additional burden, according to the bipartisan Tax Policy Center. Households with income between $500,000 and $1 million will pay an average of $14,812 more.

Republicans — and the rest of us, too — can take heart knowing that the deal ends uncertainty about the fate of the tax cuts passed under President George W. Bush. Much of the reason the fiscal cliff existed in the first place was that Republicans, using budgetary sleight-of-hand, put a 10-year limit on the tax cuts, yet had no intention of letting them expire. No longer will Congress keep taxpayers guessing whether the tax cuts will survive or die.

With the federal government having hit its debt ceiling, Republicans hope to replay their 2011 demand that debt-limit increases be matched dollar-for-dollar with spending cuts. Obama laid down a “no hostages” marker on Jan. 1 when he said future deficit-reduction deals must balance spending cuts with further tax increases. At the same time, Obama said he’s open to compromise. Medicare spending can be reduced, he said, perhaps by limiting cost-of-living increases. We agree that hostage- taking is unacceptable and that Obama’s Medicare offer is a good place to begin the next round of negotiations. Now it is House Republicans’ turn to name the revenue-raisers they can accept, or the spending cuts they want.

Lest we forget, Congress already made more than $1 trillion in spending cuts in 2011. An additional $1.2 trillion could be saved or raised later this year. When added to the just-concluded pact, the total could come close to $3 trillion in spending cuts and tax increases over the coming decade. Deficit reduction in fits and starts is still deficit reduction.